AbbVie Inc.; market cap (as of 06/03/2015): $88.7bn
Pharmacyclics Inc.; market cap (as of 06/03/2015): $19.3bn
Introduction
On March 4, the pharmaceutical company AbbVie, outbidding the competitor Johnson & Johnson, agreed to buy the cancer biotech company Pharmacyclics in a $21bn transaction. The Chicago based company will pay $261.25 per share to buy the company that produces the world’s leading blockbuster blood cancer treatment. The deal will help AbbVie to reduce its dependence on Humira, its best selling arthritis drug, while boosting its oncology drugs pipeline.
About AbbVie
AbbVie Inc. (AbbVie) is a pharmaceutical research company that was spun off from Abbott Laboratories at the beginning of 2013. The company discovers, develops, manufactures and sells pharmaceutical drugs in more than 170 countries. Its most popular drugs are the arthritis and Crohn’s disease treatments Humira, which accounts for half of AbbVie’s sales, Niaspan for high cholesterol, Kaletra and Norvir for HIV disease and the low testosterone treatment AndroGel. The American company’s pipeline also includes more than 20 compounds or indications in Phase II or Phase III development.
About Pharmacyclics
Pharmacyclics is a biopharmaceutical company founded in 1991 in Sunnyvale, California. The company, which was created with the intent of resolving the needs of cancer patients, develops and sells small-molecule drugs for cancer and immune diseases treatment aiming to improve the quality and to increase the duration of life of patients affected by those diseases. Company’s key product is Imbruvica, a first in class oral medicine used to treat patients with chronic lymphocytic leukemia (CLL) and two other rare blood cancer diseases: mantle cell lymphoma (MCL) and waldenström’s macroglobulinemia (WM). Imbruvica has gained the approval from the US Food and Drug Administration to treat different types of cancers and it has been approved in other 40 countries too.
Deal Structure
AbbVie has agreed to buy Pharmacyclics in a transaction valued $21bn. Under the terms of the deal, AbbVie will pay $261.25 per share in cash and stock, representing a 13% premium to Pharmacyclics closing price on March 4. The premium climbs to 38.6% if we consider the target’s closing stock price on February 24, before rumors of a potential sale began. The deal will be paid for 58% in cash and for the remaining 42% in AbbVie’s stocks. Pharmacyclilcs’ stockholders would also have the possibility to elect for 100% stocks, 100% cash or a combination of the two, subject to proration. AbbVie is planning to finance the transaction through cash, new debt and stocks.
Imbruvica US sales are expected to be $1bn this year and analysts estimate that the worldwide sales will be around $5.8bn by 2020. Following this estimates, AbbVie believes that the deal would be “highly accretive” to its revenues and earnings by 2017.
The deal is expected to close in the middle of 2015, depending on customary closing conditions, including regulatory approvals.
Deal Rationale
The acquisition of the cancer drug maker Pharmacyclics and its flagship product, Imbruvica, with a price tag of $21bn seems a pricey but strategically compelling opportunity for the drug maker AbbVie. The company now receives more than 60% of its revenues from a single product, the Humira rheumatoid arthritis treatment. However, its US patent is going to expire at the end of the next year and new-generic versions, already present in other areas of the world, are expected to flood the market and shrink sales. Therefore, AbbVie’s need for the new popular drugs is essential in order to maintain its growth. In fact, last year Mr. Gonzalez, AbbVie’s CEO, tried to reduce dependence on Humira product by making a $55bn bid to acquire Shire, the UK-listed rare disease specialist. Yet, the deal was nullified by both sides following the new US Government regulations regarding the tax-inversion deals, which slowed the momentum behind the inversion attempts in 2014.
Pharmacyclis’ Imbruvica, the drug approved in the late 2013 by U.S. Food and Drug Administration (FDA), is the only therapy to have received three “Breakthrough Therapy” designations by the FDA. In fact, the treatment was approved for the use in four indications to treat three different types of blood cancers including chronic lymphocytic leukemia, mantle cell lymphoma and Waldenstrom’s macroglobulinemia. The drug has provided a breakthrough for patients with hard-to-treat chronic lymphocytic leukemia, as it outperformed the best existing treatment in clinical trials. An easy-to-use oral pill that costs around $100,000 a year generated $730m of sales during its first year on the market in 2014 and that has the advantage of being more an indefinite long-life treatment rather than a one-time cure. In sum, being one of the hottest new drugs in the industry, Imbruvica is forecasted to become a multibillion-dollar blockbuster.
AbbVie’s CEO believes that Imbruvica will face the success of Humira rheumatoid arthritis treatment, as it is also a drug that can be used for treatment of various types of cancer. Mr. Gonzales also believes that through the acquisition it will be able to accelerate the company’s commercial presence in oncology, which the company lacked before, leveraging on Pharmacyclics’ excellence in the field. For instance, AbbVie plans to use the existing infrastructure of Pharmacyclics in cancer to help sales of its own drugs, such as ABT-199, which treats blood cancers.
At this point a question arises: is AbbVie buying an overlapping drug? The answer is negative and relies on two main arguments. First, it may take until 2016 for ABT-199 to be approved, whilst Imbruvica has already been approved and has shown itself to be a preferred drug for many patients. Second, and most important, empirical research by scientists proves that the combination of the two drugs is highly synergistic in the cure of blood cancers. Hence, AbbVie may achieve a de-facto “monopoly” in blood cancer treatment.
AbbVie vs J&J in the bidding war for the blockbuster drug
In a period of frequent consolidation in the drug industry, few sale processes have been as intense as this one. Three buyers found themselves in a bidding war, which lasted only a couple of days. The other known bidder was the pharmaceutical giant Johnson & Johnson, which was initially expected to close the deal because of its existing partnership with Pharmacyclics to co-market Imbruvica. Yet, AbbVie was willing to pay more by bidding $261.25 a share – more than double the company’s share price at the start of the year, when J&J had offered $250 a share. The higher bid by AbbVie could be explained by its bigger need to keep a rich pipeline of new drugs as compared to J&J, which has a diversified healthcare portfolio of products ranging from orthopedic implants to baby care products.
Yet, did AbbVie overpay? The $261.25 bid a share by AbbVie for Pharmacyclics represents a premium of 13% to Pharmacyclics closing price on March 4. And, even considering the abovementioned 38.6% premium calculated on pre-rumors Pharmacyclics stock price, it is in line with recent acquisitions in pharma. However, there is a fine point here: AbbVie will not see all of the profits flowing from Imbruvica sales. Indeed, Pharmacyclics must split them with Johnson & Johnson, which has half of the rights to Imbruvica. Therefore, if we consider, in a simplistic view, only Imbruvica sales, Pharmacyclics would have to generate double the deal price for AbbVie to get its return and the blockbuster drug would reach a valuation of around $40bn.
On the one hand, the relatively high price paid could be justified by the empirically proved medical synergies with ABT-199 and the resulting de-facto “blood cancer monopoly”. On the other hand, for the deal to pay off, AbbVie will be relying on successful clinical trials needed to expand Imbruvica into other disease areas and a strong pick up in the price, which might place it among most costly cancer drugs in the industry. However, this topic is very sensitive since the industry is beginning to face tougher scrutiny over the cost of drugs in the US despite having traditionally enjoyed strong pricing power in oncology. Moreover, since the newly drug in its portfolio is not an infinite-life asset, AbbVie will have time to meet its peak estimates only until 2026, when Imbruvica will lose its patent protection.
The current trend in Pharma M&A
From the beginning of 2015, including AbbVie’s purchase, there has been nearly $71bn of takeovers of biotechnology, pharmaceutical and health-care companies. In fact, although the talk of tax inversions has cooled, the string of mergers and acquisitions in the healthcare industry continues relentlessly, and investors are generously rewarding many of the companies currently in the spotlight. The judgment of the market seems overall positive, since these mergers are not driven by tax inversion reasons but by long term sustainable strategies: now it is increasingly about drug companies concentrating on what they do best or strengthening in areas in which they are weak. Though, this creates a potentially dangerous mechanism in the market, with the smaller and successful pharmaceutical firms, like Pharmacyclics, that almost systematically experience a boom in their share price because of the inevitable and awaited spectrum of a merger: this not only creates excitement around one of the riskiest businesses of the market, but may also disincentivize acquiring companies in pursuing significant advances in innovation or research productivity. Nevertheless, it is worth mentioning that this situation may also create an opposite virtuous effect, stimulating innovation in smaller companies as scientists with good ideas create startups, encouraged by the prospect of a lucrative buy-out by a larger firm.
Financial Advisors
Morgan Stanley & Co. LLC acted as financial advisor to AbbVie. Centerview Partners LLC and J.P. Morgan Securities LLC acted as financial advisors to Pharmacyclics.
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